Many people feel that it’s important to leave something of their legacy behind for their children and grandchildren. Often, getting older triggers an increased awareness and desire to leave the community, as well as family, in a better position than they were previously. This desire often manifests as financial generosity, where grandparents may leave an inheritance—either large or small—to their grandchildren after they pass.
If this thought has crossed your mind, there are seven potential pitfalls to be mindful of as you take steps to secure your granchildrens’ future. We’ll spend some time discussing each of these pitfalls, as well as how to avoid them.
1. Gift Your Money
Did you know that you can gift $15,000 annually to your grandchildren without reporting it?
The best way to leave money to grandchildren may well be to simply gift it to them. More than just a nice or generous thing to do, gifting your money to grandchildren makes it easier to avoid postmortem taxes, where you could be handing over more cash to the government than you would like. While it’s true that the tax rate is currently low, there is always a chance that the laws may change; thus, it’s advisable to gift some of your assets to your grandchildren now. Naming funds in a will won’t protect your money from taxation, but gifting it in advance to your grandchildren will.
2. Create a trust for your grandchildrens’ inheritance, not a will
You may not have considered this before, but there is a big difference between a trust and a will—mainly when it comes to how immediately available your funds will be to your family. In short, a will is exactly the same as a trust; however, a trust comes with the added benefit of avoiding probate. Every state has their own probate system, and if you pass away with or without a will, you will have to fill probate regardless. This can be a long and expensive process for your loved ones.
Alternatively, by establishing a trust, you can avoid the courts and probate if you title your assets correctly. This means that your grandchildren will receive their inheritance quicker, cheaper, and without having to enter the public domain.
3. Decide on a family pot trust or individual trusts
This one largely depends on the size of your family. If you have a small family, setting up individual trusts with an equal amount of money for each family member or grandchild may make the most sense.
For a larger family with many offspring, it will probably be more efficient for you to establish a family trust. From here, your trustee—which may be either corporate or personal in relationship to you—will decide on elements such as fund distribution, timing of payments, and more. If you have specific terms written into the trust, your trustee should ensure those terms are honored. If you don’t have set terms, your trustee will then make decisions such as whether all of your grandchildren receive the same amount of money, or may distribute the funds based on need.
A pot trust is also a good option for leaving a continuous financial legacy for your family for generations.
4. Don’t (or do) set age provisions on your trust
Leaving your inheritance to your grandchildren is a wonderful gift; however, they may not be in a position to receive the funds when you pass on. For example, they may still be under the age of 18, and therefore still minors. Some state laws prohibit minors from receiving more than $15,000 in inheritance.
While most trusts have age provisions, or terms that state a beneficiary must be a certain age before receiving their inheritance, you don’t have to set up your trust this way. In fact, you can set the age that you feel is appropriate for your grandchildren to receive their funds. Doing so will ensure your underage grandchildren receive the intended amount of their inheritance.
On the flipside, perhaps you’d prefer that your grandchildren are adults before they receive their inheritance. In this case, simply indicate in your trust that they should be 18 years of age before they have access to their money.
5. Consider implementing a “Spendthrift Provision”
You can add a spendthrift provision to your trust if you have concerns about the financial maturity of your grandchildren, whether due to age or their current financial habits. In a trust, a spendthrift provision works to prevent your beneficiaries from squandering their inheritance by restricting their access to trust principal. It will also protect your trust from any creditors to whom your beneficiary might owe money.
A spendthrift provision will make some of your trust property available to the grandchild(ren) in question, but they will only have access to the funds through your designated trustee, who will make the distribution decisions.
6. Specify how your grandchildren should use their inheritance
You may have a specific vision or wish when it comes to the way your grandchildren will use their inheritance. Whether it’s having the funds for their dream college, paying for a house, or starting their own business, you may have your heart set on helping your grandchildren achieve specific worthwhile goals and milestones.
If this is the case, consider designating what the funds you’re leaving behind should be used to accomplish. Even if you trust that your grandchildren will handle their inheritance responsibly, they might not have the same clear vision that you do regarding how they should spend it. Thus, it will be beneficial if you clearly communicate how your grandchildren should spend their inheritance.
7. Be clear and concise in the details of your trust
The thing about ambiguous language? It leaves room for manipulation and greed.
To avoid your money being acquired and spent by relatives whom you never intended to receive a penny, communicate your intentions and wishes as clearly as possible in the terms of your trust. Doing so will ensure that the money you’re leaving to grandchildren is distributed as planned.
Enlisting the help of an experienced estate planning attorney will help you avoid any possible ambiguity in the terms of your trust. Terms that may seem clear to you may, in fact, need more clarification to guarantee that your grandchildren get what’s coming to them.
In conclusion, if you’re a grandparent who loves the idea of leaving money to grandchildren in a trust or as a gift, these seven tips will help give you peace of mind as you plan for the future.
If you’re not sure where to begin, it may be useful for you to find an attorney that specializes in estate planning to help you set up a trust fund for grandchildren. You’ll be able to designate the terms of the trust, such as when the income and principal will be made available to them and even how they should spend the money.